If It’s Scarce, Why Is It Still Cheap? : Water: By keeping the price artificially low, we reduce the incentive to conserve while encouraging excessive use.

After a four-year drought, our state’s residents, primarily in metropolitan areas, are being urged to voluntarily cut back their water consumption to forestall mandatory rationing. To help achieve a 10% “voluntary” cutback in Los Angeles, policy-makers have imposed penalties for daytime watering, hosing down driveways, unrepaired leaks and serving unrequested water in restaurants. “Drought-busters” have been dispatched to find and cite violators.

If water is so scarce, why is it priced so cheaply? Around the state, and particularly in agricultural areas, water is priced below its replacement cost. In the Imperial and San Joaquin valleys, for example, water is sold for 10% to 20% of what it takes to replenish supplies. Pricing water below cost results in anomalies such as the profitable growing of hay in Death Valley and the recent planting of thousands of daffodil bulbs in Ridgecrest, a community in the Mojave Desert.

Pricing water by its cost would offer several advantages over the current approach of hoping for conservation while encouraging overconsumption. First, rather than relying on a few central planners to concoct ways of promoting conservation, a higher price would give many consumers an incentive to come up with ways to cut consumption.

Second, for detecting and punishing consumers who “waste” water, pricing has no equal. From aqua-addict Harold Simmons of Montecito, who used nearly 10 million gallons in 1989 to keep his lawn lush, to the farmer who sprays her crops with sprinklers (a process in which most of the water evaporates) and even to the politician who throws away the broccoli on his dinner plate, the price tool could successfully find and punish all water wasters in proportion to their offenses. Why rely on snitching neighbors and/or a roving team of drought-busters to find and fine all the owners of leaking toilets in Santa Barbara when the price mechanism is so effortless and thorough?.

Third, setting a price for water that more accurately reflects its scarcity today will more quickly encourage the development of substitute sources, such as desalination, tomorrow.

Fourth, in contrast to a rationing system that requires users to cut back a set amount, price does not discourage the development of new products and industries. A new industry cannot be created when water is allocated based on past consumption.

Finally, a scheme requiring all users to cut back by the same 10% does little to encourage consumers who could make drastic reductions. Nor does such a scheme take into consideration consumers who cannot readily reduce their water use--perhaps because of a new baby in the house, or increased demand for a company’s product.

We shake our heads smugly at the long lines for meat, bread and apartments in the Soviet Union and Eastern Europe. But what we have yet to realize is that when it comes to water, our policy is the same as theirs. We keep the price artificially low, thereby reducing the incentive to produce while encouraging excessive use.